Saturday, January 24, 2009

Don’t nationalise banks but...

...nationalise the money supply.

On BBC2 this week Geoffrey Robinson minister in the Blair government and long-term friend of UK Prime Minister Gordon Brown showed his shock at the enormous amount of money that the failed Royal Bank of Scotland has been lending as it crashed out of control towards the largest loss for any company to date. He seemed surprised. You would have thought that someone so close to the center of power would realize that it is the banks that make most of the money supply for a country as they create credit out of thin air and then speed off with it round the world as they do their business.

Asset bubbles in property, in commodity or stock markets are fed as this credit creation balloon inflates around the world. Banks increasingly egg each other on by making more and more money to catch every last million of profit before the whole thing bursts.

Top man Lord Myners, the Government’s City Minister, also seems strangely out-of-touch. He is reported in the London Times today as saying that bankers have 'no sense of society'. But we must not get angry with bankers as they seem to slam the doors to lending to ordinary firms desperate to borrow to keep their businesses going. They are only protecting their own banking businesses as bad loans turn worse in horrific amounts. The credit creation system is the problem - banks just do what they have to do, because the system compels them to do so. They have a legal right to create credit (that is: money) and use it with minimal supervision. So why would one bank hold back?

But this is a bizarre thing. No one is allowed to forge banknotes or coins, but banks, in creating credit, are doing just the same thing and we are all seeing the consequences. I suggest that Geoffrey Robinson and Lord Myners study the submission made to the House of Commons Select Committee on the Treasury, by James Robertson. Click on this link: (House of Commons -Robertson ). He says it is unnecessary to nationalise commercial banks if we nationalise the money supply. The Bank of England would create the money - all money - according to agreed rules, and give it to the Government to spend into circulation - just as it does with banknotes and coins. Ordinary banks could borrow from this supply of money and lend out to those who need it. However the monopolistic profits that they have made up to recent times, by being permitted to create their own money, would cease. As some of the new money would be used to replace that currently raised by government borrowing, taxpayers would save billions every year in interest. It is likely that asset prices would be less volatile. See also references to Prof Richard Werner on this blog.